Mexico's Central Bank Leaves Interest Rate Unchanged at 3%

The closing paragraph from
the statement was almost identical to the one from the 26 March statement. The
bank wrote that it will remain watchful of all determinants of inflation and of
medium- and long-term inflation expectations, but particularly the relative
monetary policy stance (Mexico-United States) and the performance of the
exchange rate trend.

One subtle change relative to March was that in
March the bank wrote it would watch the performance of the exchange rate, and
not of its trend. Analysts believe that this may be an attempt to signal that
the currency trend is more important than outright levels.

The central
bank sounded less upbeat about global growth than in March. In this week's
report, it wrote that weakness has become more generalized across countries and
regions. In March, it had written that the drop in oil prices could result in a
net positive for global growth.

On the US Fed, the central bank wrote
that there is now a stronger perception that liftoff will take even longer than
previously anticipated. The bank argued that the drop in volatility in some
international financial markets since 26 March was in response to the
expectations of a later liftoff date by the US Fed.

On the domestic
front, the bank upgraded somewhat its assessment of the state of the economy. In
March, it wrote that economic activity had had a somewhat weak performance. This
week, it wrote that economic activity continued to show moderate growth.
Similarly, in March it wrote that consumption indicators had shown “little
vigor.” In its latest statement, it wrote that “some consumption indicators seem
to be showing some recovery.”

In March, the bank wrote that the balance
of risks to growth had worsened; this week, it wrote that the balance of risks
is still biased to the downside, but it did not worsen relative to late
March.

Finally, on the inflation front, the bank’s assessment was almost
identical to the one from the March policy statement. Specifically, the bank
continues to project annual headline inflation to be “near” 3.0% in upcoming
months and that it will close the year below this level. Meanwhile, the bank
projects annual core inflation to be below 3.0% throughout 2015. For next year,
it projects annual headline and core inflation to be “near” 3.0%. The bank
reiterated that pass-through from peso weakness has been in line with
expectations, impacting mainly durable goods, and without second-round
effects.

"Barring a major depreciation of the peso in the next five
weeks, we think that the central bank will leave the overnight rate unchanged at
3.0% in the next monetary policy meeting on 4 June," writes Alonso Cervera of
Credit Suisse. "For now, the exchange rate continues to be the key variable that
will likely determine the timing and extent of interest rate hikes in the
remainder of 2015. We think that next year, the expected rise in inflation, and
likely higher interest rates in the US will be particularly important."